Having an asset such as a property may make it easier for you to get a secured business term loan, but without timely repayments, you run the risk losing it to the lender. Photo credit: Pexels
So you did your sums and have come to the conclusion that you need a loan to take your business to the next level.
Whether you need it to accept another business contract, bridge short-term payment needs (i.e. payroll) or expand your company, the first thing you need to do is decide if you want to go for a secured business term loan or an unsecured business term loan.
However, if you or your company directors have a poor credit record or if your business is relatively new with not much to show for, you may not be able to opt for an unsecured loan.
This is because the lender is likely to conclude that it is considerably risky to grant you the loan.
Under less-than-ideal circumstances, the lender will want to have some form of tangible asset that it can recover from you should you fail to make repayments. This is what a secured term loan entails.
Such assets are also known as collaterals. Examples of collaterals include invoices, equipment, a vehicle, or a residential (non-HDB), commercial or industrial property. You need to be the owner of the asset you are pledging.
Depending on the purpose of the loan, the loan amount and tenor, some types of collaterals are more attractive to a lender; while some are not. The lender will look at the value of the asset and come to a decision after considering other criteria.
If the value of the asset is depreciating, the lender will appraise it based on its value at the end of the loan, instead of its market price at the start of the loan.
To reduce additional risks on its part, the lender may even ask for more assets to be pledged if it seems the collateral you are offering may suffer a further depreciation in its market value.
Some borrowers may even pledge jewellery or fine art, but such cases are quite rare. Property is a more commonly used form of collateral – be it residential (non-HDB only), commercial or industrial.
If you are not sure how much your property is worth, check out this Free Residential Property Valuation tool.
In a few minutes, you can get an estimate of your property’s value, along with that of other buildings in the vicinity.
The fact that the collateral that you pledged to the lender might get taken back if you default on your secured term loan repayments may be a scary – and risky – prospect to some.
But that said, applying for a loan (secured or unsecured) was never going to be a walk in the park.
In fact, you may not even know why your loan application was rejected in the first place. To complicate matters, you need to find a personal guarantor to mitigate the obvious risk of an unsecured loan for the bank or financial institution.
On the other hand, here are some perks of a secured business term loan.
Any lender (especially banks) would want to reduce the level of potential risk in granting an SME owner a loan.
By pledging an asset that you own against your loan, the risk of granting you the loan is reduced. This is why the lender is often able to offer a higher loan amount for a secured term loan – as opposed to an unsecured term loan without collaterals.
So let’s say you are applying for an unsecured term loan. Unless your credit record is excellent, a lender will want to mitigate the risk of you defaulting on the loan by giving you a shorter loan tenure. This ranges from one to 12 months.
Conversely, you are likely to get a longer loan tenor (up to five years, even) for a secured term loan – because of the asset pledged.
It goes without saying that if you consistently fail to make your loan repayments, the lender has the right to seize your asset to recover its losses – be it a property or a car.
From a borrower’s point of view, this worst-case scenario is the biggest motivation for repaying the loan. It is precisely because of this that the lender can afford to offer you a lower interest rate for a secured term loan than if you had applied for an unsecured term loan.
However, it will take longer for the lender to approve a secured term loan than in the case of an unsecured term loan that is required urgently.
The former can take up to a month or two to get approved; while the latter can be approved in just a few hours if necessary.
But one upside is that most secured term loans have a higher borrowing limit than unsecured term loans.
Well, we say this with some reservation as the degree of ease really depends on the lender and its (undisclosed) set of criteria that borrowers have to fulfil.
What you can do is check your loan eligibility with the SME Business Loan Eligibility Check, which is free to use and shows – in the form of a percentage – you how likely you are to get a loan based on your needs.
In general, it should be easier to get approval for a secured term loan if you have an asset to pledge (even if your credit rating isn’t that ideal) as compared to an unsecured term loan, which poses a greater risk for lenders.
It is crucial to consider your needs and the purpose of the loan carefully before applying for one. Though a secured term loan has its perks, so does the unsecured term loan.
The latter may work for you if you have a good credit rating and a personal guarantor – especially if you need the loan urgently.
Always clarify your doubts before applying for any type of loan. Most importantly, you must be reasonably confident that you can make your loan repayments on time before you pledge your property or car as collateral – or run the risk of losing it to the lender.
Ask the lender what will happen if you are unable to make your repayments on time due to cashflow problems.
Will some flexibility and leeway be given? Are repayment options customizable? What are the fees and charges for late repayments? Under what circumstances will your asset be claimed by the lender?
Don’t forget late repayments and defaulting will affect your credit rating, so plan your finances carefully to ensure you can make your loan payments on time.
Still confused about which type of loan to choose? Create an account with us and submit a loan request via our Business Loan Marketplace to receive multiple loan offers from our network of 45 lender partners at no charge.
Belinda loves thinking about random stuff, and collecting useless bits of facts and trivia. She often roots for the underdog, and believes the world needs more happy endings.
